The Hindu Business Line : Gremach Infrastructure: Avoid

Though the company's growth prospects are bright, the market is likely to throw better opportunities for investors to enter the stock later when it is valued attractively.

Investments can be avoided in the initial public offer of Gremach Infrastructure Equipments and Projects (GIEPL). In the price band of Rs 75-90, the offer is priced at about 12-15 times its likely FY-07 per-share earnings, on a fully expanded equity base. In the business of renting construction and earth-moving equipment to various companies, GIEPL is well-placed to benefit from the booming activity in infrastructure. Notwithstanding the bright growth prospects for the industry, we feel that, at the given price-band, the company's valuations appear stretched vis-à-vis its more-established peer, Sanghvi Movers, which trades at 11 times its likely FY-07 EPS.

Also, given the recent correction in the market, investors with a long-term perspective and wanting to participate in the infrastructure boom, would be better off investing in pure construction or infrastructure companies, which are available at compelling valuations.

Business

GIEPL, in general, rents machinery to companies that build roads, airports, institutional and industrial complexes, multiplexes and residential buildings, power projects and so on. GIEPL also rents equipment that are hired from third-parties. The third-party hiring business comprises 83 per cent of its total rental income.

GIEPL has seen robust growth in earnings over the last three years, backed by improvement in rental income and operating margin. Increase in the number of orders, coupled with better capacity utilisation and addition of new machines, perhaps, explains the growth in earnings.

Investment rationale

Given the increased allocation in the Budget t for infrastructure development, the equipment rental industry is sure to witness significant growth. The probability of growth of recognised players such as GIEPL, which has such established clients as Larsen and Toubro, Punj Lloyd and Hindustan Construction, is likely to be higher. GIEPL's involvement in high-profile projects such as the Bandra-Worli Sea Link, Reliance Infocomm project and the Mumbai-Pune Expressway raises confidence in the company's ability to procure business.

However, it is to be noted that such high-profile liaisons could also limit the company's pricing power. However, regardless of the favourable industry dynamics, much would depend on GIEPL's ability to manage the overall requirement of its clients with its limited stock.

The company is also likely to have little control on the capacity utilisation of its machinery, given its project-specific business. Furthermore, the company runs the risk of technical obsolescence of its products. This essentially means that a significant portion of GIEPL's earnings would have to be deployed for the technological upgradation of its owned equipment. Besides this, since GIEPL's business depends wholly on the infrastructure play, any slowdown in the economy or delay in capex plans could pose a significant threat to its earnings.

Offer details

The offer is open from March 8-14. The company seeks to raise Rs 59 crore through this offer. RR Financial Consultants is the lead manager to the issue and Intime Spectrum Registry is the registrar to the issue.

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